A layperson’s guide to the federal budget 2018-19

As finance minister, presents the federal budget 2018-19, which will be the last of the incumbent Pakistan Muslim League-Nawaz (PML-N) government, it is high time to make an attempt at uncovering the story hidden behind the numbers. The idea is to enable the reader to: (a) understand the main issues at play in the budget formulation process; (b) comprehend the fierce competition between different sectors vying for scarce resources; (c) read between the lines because the government mostly hides its inefficiency through jugglery, if not outright fudging, of figures; (d) evaluate the government’s revenue and expenditure priorities over the past five years, with a view to gauging which sectors have received a preferential treatment during this period; and (e) do a basic level analysis of the budget.

BUDGET GUIDE2018-19

Resource vs Expenditure

Resources mean how much money the government will gather in a fiscal year and how it will gather it; while expenditure means how much money the government will spend in the year and on what.

In the outgoing budget (FY 2017-18), total resources (internal, external and privatization proceeds) were estimated at Rs. 4,714 billion; while the total expenditure (current and development) was placed at Rs. 5,104 billion. The estimated deficit of Rs. 390 billion was likely to be met through bank borrowings.

Issue: Underestimation of expenditure and overestimation of resources at the time of budget presentation.

Current Expenditure vs Development Expenditure

Current expenditure includes government spending on salaries, rentals, office requirements, operating expenses of public-sector industries, and servicing and payment of interest on loans; while development expenditure includes government spending on new projects – schools, health units, roads, dams, etc. – that have a life of more than one year.

In the outgoing budget, current expenditure was estimated at Rs. 3,764 billion; while the development expenditure at Rs. 1,340 billion.

Issue: Underestimation of current expenditure and overestimation of the development expenditure at the time of budget presentation.

Direct Taxes vs Indirect Taxes

Direct taxes (mainly income tax) are paid directly to the government and their major objective is income redistribution in the society since only the people above a certain level of income have to pay them; while indirect taxes(mainly sales tax, customs duties and federal excise) are levied on commodities and transactions, and are paid to a second party, mostly the seller of a good, which then passes them onto the government.

In the outgoing budget, direct taxes were estimated at Rs. 1,595 billion; while indirect taxes at Rs. 2,418 billion.

Issue: Underestimation of indirect taxes that affect all citizens across the board and overestimation of direct taxes that affect only the well off.

Domestic Debt Servicing vs Foreign Debt Servicing

Domestic debt servicing implies the interest paid on the money borrowed by the government from its own people in different forms, such as saving schemes, prize bonds, General Provident Fund of government employees, etc.; while foreign debt servicing implies the interest paid on the money borrowed by the government from external sources such as the World Bank, International Monetary Fund, Asian Development Bank, etc.

Issue: Against common perception, Pakistan’s major problem is not foreign debt since the mark-up on it does not comprise even 10 percent of the country’s total mark-up payments.

Tertiary Education vs Primary/Secondary Education

Tertiary education refers to public sector universities and colleges; while primary and secondary education to public sector primary and middle/high schools.

In the outgoing budget, current expenditure on tertiary education was estimated at Rs. 68.252 million; while on primary and secondary education at Rs. 8,748 million and Rs. 10,798 million, respectively.

Issue: Because of the lack of absorption capacity at the primary and secondary level, successive governments since the turn of the century have allocated more funds to tertiary education, though the country’s foremost need is universal primary education.

Industrial Sector vs Agriculture Sector

Budget-making is a process of opting for some of the available priorities at the cost of others. Traditionally, the PML-N and military regimes favour the industrial sector (or people living in urban areas); while the Pakistan Peoples Party favours the agriculture sector (or people living in rural areas).

In the outgoing budget, subsidies were estimated at Rs. 139 billion, of which as many as Rs. 118 billion were aimed at helping the industrial sector, while meagre support was provided to the agriculture sector.

Issue: The PML-N government’s bias against the agriculture sector has been obvious over the year and today it has probably the last chance to elicit the support of rural voters.

Mega Projects vs Micro Projects

Mega projects such as highways and metros have been a favourite with the PML-N government because of the hype they create; while micro projects such as small dams or rural roads have received little attention over the past five years.

Issue: The centralised structure of mega projects makes their public scrutiny almost impossible. Such projects are also prone to corruption in the form of kickbacks during the award of contracts. In comparison, micro projects are not only easier to manage but also more transparent.

Men vs Women

Budget is supposedly a gender-neutral document because the government does not discriminate between men and women while allocating resources or generating revenue. However, considering that the women lag behind men in most walks of life, there is a dire need to allocate special funds to bring them on a par with men.

Issue: The need of the hour is to allocate more budget aimed at bridging the gap between men and women and introduce gender-responsive budgeting in all ministries at the federal level.

Under Budget Revision

The government is often taken to task for inefficient management of the economy, but the real point is missed somewhere. A budget is not a scripture that could not be changed, but a government has no justification to share incorrect revised estimates. In Pakistan, there has been an increasing trend to project the revised budgetary figures of the outgoing fiscal year, included in the next fiscal year’s budget document, in a manner that they hide the government’s inefficiency, which becomes evident only after the actual budgetary figures are released in mid-August. As the focus of attention has drifted from the budget by then, the government does not have to face much criticism from any quarter, be it the opposition or media. What is hidden in June is thus quietly revealed in August.

False Estimation

Comparisons make up the most of budget documents, though they are used in Pakistan to highlight ‘achievements’ only. To make these comparisons look good, the government does not hesitate to hide the reality where possible. For example, it always underestimates the expenditure, especially current, and overestimates the revenue in the revised estimates. This helps the government prove a point: not only are its projections for the next fiscal year realistic, but also its performance in the outgoing fiscal year had not been that bad. These discrepancies have resulted in an ongoing process whereby the government is forced to resort to the same practice year after year, subsequently bridging its budget deficit through more bank borrowings and thus putting more burden on the economy. Let’s hope against hope that this budget is different.